GENM’s 9MFY23 results disappointed but it is firmly profitable again. Its 3QFY23 performance was buoyed by revenue and profit recovery at RW Genting (RWG). Likewise, its operations in UK did surprisingly well, but higher payroll cost dampened US contributions. We cut our FY23-24F net profit forecasts by 11% and 7%, respectively, but maintain our TP of RM3.07 and OUTPERFORM call.

GENM’s 9MFY23 core net profit of RM54.9m disappointed, accounting for only 25% and 21% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from a slower-than-expected return of tourists.

Its 3QFY23 RWG’s earnings continued to strengthen QoQ and YoY. 9-month footfall rose 13% YoY at the hilltop resort on positive demand and the opening up of more capacity. North American (US & Bahamas)’s contribution were subdued with margins dampened by high payroll following a new collective agreement with workers. UK fared better with underlying business volume up QoQ and YoY. As expected, no dividend was declared for the third quarter.

RWG saw growing visitors of 15.7m in 9MFY23 (+13% YoY) but still has room to grow. Moreover, we suspect RWG is only starting to manage yields to achieve higher spending per visitor. While the local crowd has returned along with Singaporeans and Indonesians, mainland Chinese tourists have yet to make any significant come back. Marketing spending is thus set to still stay high but stabilising along with personnel costs. EBITDA margin is expected to improve from current 24%-28% towards 30%-33% over the next year or two.

North American contributions have surpassed pre-pandemic level, thanks to earlier post-Covid relaxation in US (mid 2021) but also capacity expansion. RW New York City’s earnings were firmer partly on Hyatt Regency JFK Airport opening last August. 49%-associate Empire has also launched Resorts RW Hudson Valley in Dec 2022 which has broken even. Despite rising revenue outlook, visitor spending could moderate ahead while payroll and marketing costs are expected to stay high.

Despite encouraging 3Q performance, UK operational headwind remains amidst inflationary pressures and soft consumer spending.

Forecasts. We cut our FY23-24F net profit forecasts by 11% and 7%, respectively.

However, we keep our TP of RM3.07 based on SoP (see Page 3). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

GENM’s RWG is a beneficiary of local consumer spending and inbound tourism rebound. New properties in North America are also supportive of stronger revenue ahead. So far high marketing and recruitment costs have been dampening margins but this should ease moving into FY24. The recovery momentum looks promising albeit at a more gradual pace. Maintain OUTPERFORM.

Risks to our recommendation include: (i) non-renewal of licenses, (ii) unfavourable prize payout ratios, (iii) weak consumer spending amidst high inflation, and (iv) products perceived to be socially undesirable.

Source: Kenanga Research - 24 Nov 2023